IRS Warns of Looming Deadline to Correct Improper Tax Credit Claims or Face Penalties

The IRS has warned of a fast-approaching deadline to apply for a disclosure program for wrongly claimed tax credits to avoid penalties and interest.

The Internal Revenue Service (IRS) building in Washington on June 28, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) issued a warning to taxpayers who improperly claimed a pandemic-era tax credit that they face a fast-approaching deadline to apply for a voluntary disclosure program that will let them avoid penalties and interest—and even get a sharp discount on repayments.

The IRS warned in a March 15 notice that businesses that were “misled” by predatory promoters into filing improper employee retention credit (ERC) claims have until March 22 to take action to fix the problem.

“The window of opportunity is closing for those with questionable claims to fix things before they receive follow-up compliance action,” IRS Commissioner Danny Werfel said in a statement.

The ERC is a refundable tax credit designed for businesses that continued paying employees during COVID-19 shutdowns.

A large number of improper ERC claims were pushed by predatory promoters on unwitting businesses, with an investigation by the IRS Criminal Investigation (IRS-CI) division earlier uncovering more than $2.8 billion of potentially fraudulent ERC claims.

The IRS said on March 15 that it had “sharply” increased its compliance actions around ERC claims through audits and criminal probes and that more such activity is planned in the future.

However, because of the large number of wrongly filed ERC claims and the predatory promotions surrounding them, the IRS developed several ways to get taxpayers who incorrectly claimed the credit to pay it back with minimal penalty.

One such initiative was a voluntary disclosure program, first unveiled in December 2023, which lets employers who wrongly filed for the ERC get right with the tax authorities by admitting to the mistake.

In exchange for volunteering this information, businesses get to keep 20 percent of the incorrectly received credits, and they won’t be charged any interest or penalties on the remaining 80 percent that they repay.

Withdrawal Program

Another program the IRS rolled out in October 2023 was a special withdrawal process that lets businesses that filed a questionable claim withdraw it and avoid the risk of costly penalties and interest.

Interest on money owed to the IRS compounds daily and the failure-to-pay penalty accrues monthly and can rise to as much as 25 percent of the owed amount.

The withdrawal option lets employers avoid future problems by withdrawing pending ERC claims if they suspect they may have been tricked into filing and have not yet been paid.

Even if a business has received the ERC refund check but hasn’t yet cashed or deposited it, it can still withdraw its claim.

The IRS said that a business or tax-exempt group could find itself in a much worse cash position if it has to pay back an improperly claimed tax credit than if it had never claimed it in the first place.

Claims that are withdrawn will be treated by the IRS as if they were never filed, and the agency won’t impose penalties or interest.

“We have good solutions for taxpayers to do the right thing now and avoid hassles and expenses for themselves later–but March 22 is rapidly approaching,” Mr. Werfel said in the March 15 statement.

“The domino effect of an incorrect claim can cost a business valuable time, energy and money down the road,” he added.

Installment Agreement

The IRS also said on March 15 that if a taxpayer is unable to pay the full amount of the incorrectly obtained ERC (minus 20 percent that they get to keep under the voluntary disclosure program), then they can apply for some relief.

Specifically, if a taxpayer is unable to pay the full amount, they can set up an installment agreement with the IRS that lets them make monthly payments.

In such a case, after a closing agreement has been executed, an IRS collection team member will be assigned to the taxpayer’s case and will “look to offer a resolution that fits the taxpayer’s current financial condition and ability to pay.”

In general, there are other forms of penalty relief that taxpayers can apply for. For instance, the IRS might agree to waive penalties for taxpayers who didn’t file on time or pay the taxes they owe under “reasonable cause” penalty relief provisions.

Extenuating circumstances that might qualify a taxpayer for such relief include things like illness or natural disasters.

There’s also a “first time penalty abate and administrative waiver” process that could allow taxpayers to qualify for penalty relief even if they’ve missed a filing deadline or a payment due date.

Generally, this type of relief applies to taxpayers who have filed all their tax returns, paid their outstanding balances, or set up an installment agreement, and have not been subject to IRS penalties over the past three years.

The first-time penalty abate is discretionary, so the IRS is not required to grant the waiver. However, the agency may grant it as a one-time favor if the applicant has a good compliance history and meets program requirements.